Thoughts on individual stock market sectors in 2018

This is a hard question to answer, which is why I only trade the S&P 500’s ETFs. Even in my hedge fund days, we never traded sector ETFs because we didn’t have a consistent and accurate way of predicting which sectors would outperform.

Here’s the S&P 500’s sectors in 2017.

Notice how tech clearly outperformed the index in 2017, while energy and telecom underperformed.

*Tech is the S&P 500’s largest sector while energy and telecom are small sectors.

I stated that the 2 year Treasury yield is EXTREMELY OVERBOUGHT on every single time frame.

Here’s the 2 year yield and daily RSI (14).

Here’s weekly RSI.

Here’s monthly RSI.

So if the 2 Treasury yield consolidates/corrects during the first half of 2018, then that is not bullish for the finance sector. Finance will struggle if yields struggle.

The energy sector depends on oil

I don’t think the energy sector will significantly outperform the S&P 500 in the first few months of 2018.

The energy sector is highly correlated to the year-over-year change in oil $.

Here’s WTI oil.

Here’s XLE (energy sector ETF). Notice that oil tends to lead XLE by approximately 1 month.

The U.S. oil rig count is set to explode in 2018. As a result, I don’t think oil will go up significantly in the first few months of 2018. Based on the energy sector-oil correlation, I don’t expect the energy sector to outperform in the first few months of 2018.

Bottom line

So which sectors will outperform in 2018? It’s hard to say. Perhaps consumer discretionary will outperform as